Caterpillar 4Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

2015 shaping up to be a much tougher year than we thought

“Now for the 2015 outlook, well it’s shaping up to be a much tougher year than we were expecting when we went through our preliminary view of 2015 with you all last October. It’s been definitely a developing story as oil prices have continued to decline. “

More negative on 2015

“As I’m sure you picked up from our financial release this morning, we are more negative on prospects for 2015 than we were three month ago when we provided you with our preliminary view of 2015 sales and revenues.

Now expecting revenues down 9% instead of flat

“Back in October, we expected sales and revenues with the flat to slightly up. Our current view is that sales and revenues will be about 50 million and that’s down over 9% from 2014.

All because of lower oil prices

“Without a doubt, the impact of substantially lower oil and gas prices is the most significant reason we’re expecting lower sales in 2015.
Significant reduction in oil producer capex

“With the oil this low, we expect substantial reductions in producers CapEx and that it will be negative for our sales.

Direct and indirect exposure to oil and gas industry

“The oil and gas exposure is however diverse. They’re on the front-end with engines for drilling, engines transmission and pressure pumps for well servicing. We have engines that go into compressor sets for gas gathering, we’ve engines and turbines that move oil and gas along the pipeline. And our turbines are used extensively on offshore production pipelines.
Now in addition to those direct exposures in energy and transportation, there are some indirect exposures that are real but a little more difficult to put a specific number on.
For example, we saw marine engines and some go into vessels that service offshore oil and gas platforms on the rail business with services and locomotives and oil transport has become an increasing business for our rail customers.

Oil and gas represents half of the sales decline projection

“Order of magnitude roughly half of our expected year-over-year decline in sales is from these – both direct and indirect impacts from the fairly dramatic decline in oil prices.

The other half is currency and mining has taken another leg down

“Now in addition to the impact of oil and gas, there are several other factors that are contributing to the decline in the sales and revenues outlook. Year-over-year we expect the stronger dollar to be a sales headwind. Commodity prices in mining have also taken another leg down over the past few months.

Weakness in agriculture too

“With weakness in agriculture, we’re also expecting lower sales of industrial engines and we expect our rail business to be down in 2015 after a great year in 2014. Now that’s not a new development

Expectations for China are lower too

“our expectation for the construction industry in China is also lower.

Stronger dollar bad for sales but good for costs

“the stronger dollar was negative for our sales is positive for costs overall and that’s because of our non-US operations and our material purchases outside the U.S. and overall that’s expected to be a positive for profit.

Add higher pension expense on top of that

“We also have higher pension expense for our defined benefit plans and that’s a result of lower interest rates at the end of 2015 and an revision in the estimate of lifespans for the folks in our plans.

2015 should be the third consecutive year of sales declines. That’s only happened one other time, the depression

“Based on our outlook for 2015 sales and revenues, 2015 is going to be our third consecutive year of sales decline. And to put that in some perspective, that’s happened only one other time in the history of our company and that was during the great depression in 1930, 1931 and 1932.

US is still a positive but not as positive

“U.S. is still a positive but probably not quite as positive as we thought before. Almost everyplace else in the world to some degree negative. We are still not getting any decent economic growth in Europe. The developing countries Brazil, China are still let’s just say challenged.

There will be a delay in sales decline because we’ll be selling out of backlog

‘So I guess this is what we are hearing from customers is a decline in order rates for oil and gas. It probably won’t show up in our sales for at least a quarter maybe a bit more than a quarter in the second half of the year particularly for re-step engines, piston-based engines for drilling and well servicing. Our sales are likely to fall off quite dramatically for that kind of product in this – certainly in the second half of the year.

Rising dollar is not good for US manufacturing

“Rising dollar and I will expect that 2015 would see more of that will not be good for U.S. manufacturing nor the U.S. economy.
How that is offset against the lower oil, diesel, gasoline price, I don’t know how it worked out but certainly anybody producing in Japan, the U.K. or Europe particularly Germany is going to have, it has had quite an advantage over their American competitors and I would expect that they have an impact on the U.S. in some way.

There have been some order cancellations

“But yeah, we’ve had actually some cancellations, so the backlog has come down. There’s been some cancellations, but that seems to have tailed off. So, we’re scheduled out reasonably for the first quarter.

The prospects for a mining rebound are just not there

“But yeah, we’ve had actually some cancellations, so the backlog has come down. There’s been some cancellations, but that seems to have tailed off. So, we’re scheduled out reasonably for the first quarter.

We’re positive on US construction

“I will start by saying we’re actually pretty constructive about U.S. construction. So we have U.S. construction actually going up.

Don’t expect credit problems at CAT Financial

“at this moment, I would say that we don’t have any concerns relative to our portfolio performance and past dues coming off another year of improvement and I’d say we’d pretty stable heading into ’15.